ZPS AMERICA, LLC v. HAMMOND ENTERPRISES, INC.

Filing 22

ENTRY granting Hammond's 8 Motion to Dismiss. The court declines toexercise its jurisdiction over ZPS' declaratory judgment claim and dismisses, without prejudice, ZPS' breach of contract claim. ZPS may refile that claim as a counterclaim in the Hammond, Inc. action pending in the Northern District of California. Signed by Judge Richard L. Young on 3/4/2013. (PG)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF INDIANA
INDIANAPOLIS DIVISION

ZPS AMERICA, LLC an Indiana limited
liability company,

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Plaintiff,
vs.
HAMMOND ENTERPRISES, INC. a
California corporation,
Defendant.

1:12-cv-00952-RLY-TAB

ENTRY ON DEFENDANT’S MOTION TO DISMISS, OR IN THE
ALTERNATIVE, MOTION TO TRANSFER VENUE
Hammond Enterprises, Inc. (“Hammond, Inc.”), a California corporation, moves
to dismiss the present action filed by ZPS America, LLC (“ZPS”), an Indiana limited
liability company. Alternatively, Hammond, Inc. moves to transfer the action to the
Northern District of California. For the reasons set forth below, the court GRANTS
Hammond’s motion to dismiss.
I.

Background
ZPS manufactures the Mori-Say TMZ 642 CNC machine (“TMZ machine”), a

high-precision lathe that can be configured to manufacture various precision parts, in the
Czech Republic. (Declaration of Olaf Tessarzyk (“Tessarzyk Dec.”) ¶ 2; Declaration of
Alan Hammond (“Hammond Dec.”) ¶ 6). In early 2009, Olaf Tessarzyk, the president,
chief executive officer, and managing partner of ZPS, contacted Alan Hammond, owner
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and chief executive officer of Hammond, Inc., regarding a possible sale of a TMZ
machine by ZPS to Hammond, Inc. (Tessarzyk Dec. ¶ 3; Hammond Dec. ¶ 2).
In early March 2009, Tessarzyk made a sales call visit to the Hammond, Inc.
factory in Pittsburgh, California, during which Hammond informed Tessarzyk that he
needed a machine capable of producing two parts, a “body” and a “plug,” each to be
made of brass. (Hammond Dec. ¶ 2). Hammond explained that he had an established
customer that required Hammond, Inc., to manufacture and ship to that customer 65,000
each of the body and plugs every month for the next several years. (Id. ¶ 3). To meet
Hammond, Inc.’s contractual obligations to that customer, Hammond informed Tessarzyk
that he needed a machine that was capable of working virtually around the clock. (Id.).
Tessarzyk assured Hammond that the TMZ machine would meet his high production
needs. (Id. ¶ 4).
After Tessarzyk prepared a document regarding the technical specifications and
quote regarding a TMZ machine for Hammond, Inc., Hammond signed a purchase order
for a machine from ZPS on June 1, 2009, for $1,419,000. (Complaint, Ex. D). Soon
thereafter, Tessarzyk prepared a similar document regarding a second TMZ machine for
Hammond, Inc. (Id., Ex. F). Hammond signed a purchase order for the second machine
on August 19, 2009, for $1,525,686. (Id., Ex. G). Acceptance of the machines had to be
done at ZPS Zlin’s manufacturing facilities in Zlin, Czech Republic. (Id., Ex. A;
Tessarzyk Dec. ¶¶ 9-10). The parties dispute whether this occurred in Zlin. (Compare
Hammond Dec. ¶ 6 (stating that all of the acceptance testing had to be done in Pittsburgh

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due to product delays in Zlin) with Tessarzyk Dec. ¶ 10 (stating that all of the acceptance
testing occurred in Zlin).
ZPS shipped the first TMZ machine to Hammond, Inc.’s facility in Northern
California some time prior to February 2010, and shipped the second to Hammond, Inc.’s
facility in June 2010. (Tessarzyk Dec. ¶¶ 11, 19). The parties generally dispute how the
break down in their business relationship occurred. Hammond, Inc. contends that the
TMZ machines never performed as specified. (Hammond Dec. ¶ 9). Consequently,
representatives of ZPS and Hammond, Inc.’s employees met on a regular basis at
Hammond, Inc.’s Pittsburgh facility in attempts to fix the problems with the machines.
(Id.). ZPS contends that it quickly responded and addressed all of Hammond, Inc.’s
concerns and worked diligently to keep Hammond, Inc. happy. (Tessarzyk Dec. ¶¶ 13,
21). ZPS also contends that from December 27, 2011 through March 21, 2012,
Hammond, Inc. was not interested in working amicably with ZPS and demanded that it
be allowed to return the TMZ machines. (Id., Exs. 1-3).
Things came to a head on June 4, 2012. On that date, Hammond, Inc.’s lawyer
sent Tessarzyk a letter stating, in pertinent part:
It is clear to me and we will be able to prove that the capabilities,
performance and reliability of these machines were misrepresented and that
the machines have never functioned to the level that was promised – when
they have functioned at all. The only thing I am interested in hearing back
from you is that ZPS is prepared to make arrangements to accept the return
of both machines. If we do not hear from you by Friday, June 15 [2012],
that you are prepared to accept their return, we have been authorized to file
a lawsuit against ZPS and will proceed to do so. Let us be clear:
Hammond[, Inc.] does not wish to file a lawsuit against ZPS, but unless
ZPS accepts the return of both machines, you will leave Hammond[, Inc.]
no other choice.
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(Complaint, Ex. M). On June 14, 2012, ZPS, whose principal place of business is in
Marion County, Indiana, filed a Complaint for breach of contract and declaratory
judgment in Marion Circuit Court. The declaratory judgment count asks the court to
determine “that Hammond has accepted the Machines and is not entitled to revoke its
acceptance pursuant to Ind. Code § 26-1-2-608” and “that ZPS justifiably refused to
accept return of the Machines . . . .” (Complaint ¶¶ 57-58). The breach of contract count
is premised on Hammond, Inc.’s purchase of two filter systems for the TMZ machine, the
balance of which, ZPS alleges, is still owed by Hammond, Inc. (Id. ¶¶ 46, 51-52). On
that same date, June 14, 2012, ZPS’ lawyer sent Hammond a letter, with an attached copy
of the Complaint, stating that “ZPS had no intention of allowing Hammond[, Inc.] to
revoke its acceptance of the machines,” and offering to settle matter. (Declaration of
Martin Greenman (“Greenman Dec.”), Ex. A). ZPS served the lawsuit on Hammond,
Inc. by mail, which was received by Hammond, Inc.’s agent for service of process on
June 26, 2012. (Id. ¶ 3).
On July 10, 2012, Hammond, Inc. filed a lawsuit against ZPS in the Northern
District of California, seeking damages based on claims for negligent misrepresentation,
revocation of acceptance, breach of contract, breach of express warranty, and breach of
implied warranty. (Id., Ex. B). On July 12, 2012, Hammond, Inc. served ZPS with a
summons and Complaint. (Id., Ex. C). On that same day, Hammond, Inc. removed the
present action to this court asserting diversity jurisdiction.

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II.

Discussion
The Declaratory Judgment Act provides that “any court of the United States, upon

the filing of an appropriate pleading, may declare the rights and other legal relations of
any interested party seeking such declaration, whether or not further relief is or could be
sought.” 28 U.S.C. § 2201(a). As is evident from the word “may,” a federal district
court is not required to determine the rights and legal relations of parties. North Shore
Gas Co. v. Salomon, Inc., 152 F.3d 642, 647 (7th Cir. 1998), overruled on other grounds
by Envision Healthcare, Inc. v. PreferredOne Ins. Co., 604 F.3d 983 (7th Cir. 2010).
Instead, a federal district court has discretion to decline to hear a declaratory judgment
action, even if the court has subject matter jurisdiction. Tempco Elec. Heater Corp. v.
Omega Eng’g, Inc., 819 F.2d 746, 747 (7th Cir. 1987). Hammond, Inc. argues the court
should exercise its discretion and dismiss the Complaint on the grounds that Plaintiffs
raced to the courthouse to deprive Hammond, Inc., the “natural plaintiff,” of the forum of
its choosing. ZPS vigorously opposes Hammond, Inc.’s motion.
Generally, if two actions are pending in two different courts that concern the same
general claims, the first-filed case takes priority. Essex Group, Inc. v. Cobra Wire &
Cable, Inc., 100 F.Supp.2d 912, 914 (N.D. Ind. 2000). The Seventh Circuit, however,
“has never adhered to a rigid ‘first to file’ rule.” Tempco, 819 F.2d at 750 (citation
omitted). Courts generally “give priority to the coercive action1 [over the declaratory
judgment action], regardless of which case was filed first.” Research Automation, Inc. v.

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A coercive action is, for example, an action for damages or an injunction. Tempco, 819 F.2d at
749.

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Schrader-Bridgeport Int’l, Inc., 626 F.3d 973, 980 (7th Cir. 2010). Courts also depart
from the first-to-file rule if, as alleged here, the declaratory judgment action is filed in
anticipation of litigation by the other party. Tempco, 819 F.3d at 749.
ZPS advances arguments under both exceptions to the first-to-file rule. They are
addressed below.
A.

Coercive v. Declaratory Action Exception

ZPS argues that “although Count II of the Complaint is styled as a claim for
declaratory relief, it is not a pure declaratory action because it seeks to clarify Plaintiff’s
right to its own coercive remedies under Article 2 (Sales) of the Uniform Commercial
Code.” (Pl.’s Resp. at 9). The list of potential remedies under Indiana Code Section 261-2-703 includes a seller’s right to: “withhold delivery”; “stop delivery”; “resell”;
“recover damages for nonacceptance”; and “cancel.” IND. CODE § 26-1-2-703. ZPS
argues that it “is precisely its right to these coercive remedies that Plaintiff has sought to
have clarified” in its declaratory judgment action. (Pl.’s Resp. at 10).
There has been no allegation that Hammond, Inc. still owes ZPS any portion of the
$3 million purchase price of these two machines. Thus, where the machines have been
paid in full and remain in operation in California, these ostensible “coercive remedies”
under Indiana Code Section 26-1-2-703 are inapplicable. Simply put, ZPS does not seek
coercive relief under its declaratory judgment claim.
ZPS also argues that Count II of Hammond, Inc.’s Complaint for revocation of
acceptance is the mirror-image of its claim for declaratory judgment, as both claims “seek
a judicial declaration concerning the legal effect of Hammond, Inc.’s actions and
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communications as to revocation of acceptance.” ZPS thus contends that Hammond,
Inc.’s claim for revocation of acceptance is in substance a claim for declaratory
judgment. ZPS’ argument fails for the simple reason that Hammond, Inc., unlike ZPS,
does not seek a declaration of its rights; instead, it seeks damages, a return of the TMZ
machines, and a refund of the purchase price. The court therefore finds that ZPS asserts a
claim for declaratory judgment; Hammond, Inc. does not.
The court will address Hammond, Inc.’s claim for breach of contract in the
following section.
B.

“Anticipatory Filing” Exception

An important case addressing the anticipatory filing exception is the Seventh
Circuit’s decision in Tempco. There, Tempco used an omega symbol on some of its
products, which Omega Engineering (“Omega”) believed to be an infringement of its
trademark. Id. at 746-47. Omega sent Tempco a letter demanding that Tempco stop the
allegedly infringing use. Id. at 747. After Tempco failed to respond, Omega sent another
letter reiterating the demand. Id. Soon thereafter, Tempco informed Omega that it did
not intend to comply with Omega’s demand. Id. Omega responded with a letter stating
that it had no other alternative but to bring an action against Tempco to protect its
interests. Id. On the day Tempco received the letter, it filed a declaratory judgment
action. Id. Omega’s lawsuit followed four days later. Id.
Omega moved to dismiss Tempco’s action on the ground that its own action
involved the same issues, facts, and parties. Id. The district court granted the motion,
and the Seventh Circuit Court of Appeals affirmed. Id. at 747, 750. The Court held that
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where “the declaratory judgment action is filed in anticipation of an infringement action,
the infringement action should proceed, even if filed four days later.” Id. at 749.
In arriving at its conclusion, the Court examined the purposes of declaratory
judgment actions. They are to “clarify[] and settl[e] the legal relations at issue” and to
“terminate and afford relief from the uncertainty, insecurity, and controversy giving rise
to the proceeding.” Id. (internal quotation marks and citation omitted). The Court
explained that a declaratory judgment action is appropriate if the parties’ “controversy
has ripened to a point where one of the parties could invoke a coercive remedy . . . but
has not done so.” Id. In other words, a declaratory judgment action is appropriate to
“prevent one party from continually accusing the other, to his detriment, without allowing
the other to secure an adjudication of his rights by bringing suit.” Id. The Court found
Omega had not engaged in such conduct; instead, it “promptly filed suit to enforce its
claim that Tempco had infringed its trademark.” Id. The Court therefore concluded that
Tempco’s first-filed declaratory judgment action “would serve no useful purpose and was
properly denied.” Id.
Despite ZPS’ arguments to the contrary, the facts before the court are materially
similar to Tempco. ZPS received Hammond, Inc.’s letter on June 4, 2012, which set a
June 15, 2012 deadline for a response. Rather than respond to Hammond, Inc.’s letter,
ZPS filed suit on June 14, 2012, and provided a copy of the Complaint by email to
counsel for Hammond, Inc., along with a letter seeking to settle the very lawsuit it had
just filed. Only after securing a favorable forum did ZPS offer to negotiate a settlement.

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This is the type of conduct addressed by the Tempco Court as warranting dismissal of a
declaratory judgment action as an improper anticipatory filing.
Nevertheless, ZPS argues that the facts in Tempco are distinguishable from the
present case. First, unlike in Tempco where only a month transpired between the initial
allegations of infringement and the filing of a lawsuit, “Hammond[, Inc.] continually
engaged in accusatory conduct for almost six months and demanded return of the
Machines without taking any steps to ship them back to Plaintiff, and threatened litigation
for almost two years.” (Pl.’s Resp. at 2). Whether or not Hammond, Inc. “continually
engaged in accusatory conduct” or not, the fact remains that, rather than respond to
Hammond, Inc.’s letter, ZPS chose to file a lawsuit the day before Hammond, Inc.’s June
15 deadline. This sequence of events leads the court to but one conclusion -- that ZPS
filed its Complaint in anticipation of Hammond, Inc.’s lawsuit.
Second, ZPS argues that in Tempco, Omega’s suit was filed only four days after
Tempco filed suit, while twenty-six days elapsed between ZPS’ June 14 filing and
Hammond, Inc.’s July 10 filing. From this disparity in time, ZPS cites Indianapolis
Motor Speedway Corp. v. Polaris Indus., Inc., 2000 WL 777895 (S.D. Ind. April 28,
2000) for the proposition that Hammond, Inc. should be seen in the role of wrongfully
attempting to control the choice of forum because it was aware of the first-filed suit when
it filed its own.
The declaratory judgment action at issue in Indianapolis Motor Speedway was
filed after negotiations between the parties broke down and “did not come on the heels of
[Indianapolis Motor Speedway’s] assertion of right.” Id. at * 4. In other words, there
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was no letter containing a plain declaration of intent to file suit with a deadline for a
response. On that basis, the district court distinguished the facts of Indianapolis Motor
Speedway from those in Tempco. Id. The court’s reasoning applies with equal force
here. In addition, ZPS’ argument does not advance the policy enunciated in Tempco, as it
would prevent a party who was aware of a first-filed declaratory judgment action from
claiming that it was an improper anticipatory filing.
Accordingly, for the reasons set forth above, the court declines to exercise
jurisdiction over ZPS’ declaratory judgment action.
C.

ZPS’ State Court Claim

Having found ZPS’ declaratory judgment action was an impermissible
anticipatory filing, the court must next address ZPS’ remaining state law claim for breach
of contract. This claim is premised on ZPS’ allegation that Hammond, Inc. owes it
$34,850 for two filter systems, the balance of which was due in November 2010. On two
occasions, the Northern District of Illinois was faced with a similar situation and
dismissed the state law claim without prejudice for three reasons: (1) as the Tempco
Court stated, the fact that a plaintiff filed a declaratory judgment action first does not give
it a right to choose the forum; (2) the plaintiff’s additional claims for affirmative or
coercive relief may be filed as counterclaims in the second-filed action; and (3) the
plaintiff should not be rewarded for filing a declaratory judgment action as a pre-emptive
strike. Natural Gas Pipeline of America v. Union Pacific Resources Co., 750 F.Supp.
311, 314 (N.D. Ill. 1990); Associated Mills v. Regina, 675 F.Supp. 446, 448 (N.D. Ill.

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1987). The court finds the reasoning set forth in Natural Gas Pipeline and Associated
Mills highly persuasive, and adopts it as its own.
D.

Motion to Transfer

In light of the court’s ruling, the court need not reach Hammond, Inc.’s alternative
motion to transfer.
III.

Conclusion
The court finds that the action pending is a pre-emptive attempt by ZPS to secure

venue in anticipation of litigation by Hammond, Inc. The court therefore declines to
exercise its jurisdiction over ZPS’ declaratory judgment claim and dismisses, without
prejudice, ZPS’ breach of contract claim. ZPS may refile that claim as a counterclaim in
the Hammond, Inc. action pending in the Northern District of California.

SO ORDERED this 4th day of March 2013.
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RICHARD L. YOUNG, CHIEF JUDGE
United States District Court
RICHARD L. YOUNG, CHIEF JUDGE
Southern District of Indiana
United States District Court
Southern District of Indiana

Distributed Electronically to Registered Counsel of Record.

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